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# An Approximation Method to Price Volatility Options
- URL: https://fsc.stevens.edu/an-approximation-method-to-price-volatility-options/
- Published: 2023-01-25T18:12:41.000Z
- Updated: 2026-05-16T22:39:00.000Z
- Author: Dr. Dragos Bozdog
- Tags: 2021, #Import 2024-05-30 10:26, #Import 2025-11-08 22:14

**Author:** You Wang  
**Degree:** M.S. in Financial Engineering  
**Year:** 2021  
**Advisory Committee:** Dr. Ionut Florescu, Dr. Zhenyu Cui

**Abstract:** We propose an approximation method to value volatility options. This method is based on choosing models with closed form solution as an auxiliary model, and derive a mis-pricing formula between the true price and the auxiliary one, then apply Ito-Taylor expansions on the mis-pricing formula to create increasingly improved refinements. We propose an approach to evaluate volatility options under mean-reverting models, in which auxiliary model selection and expansion methods are explained. Method in this paper is applied to mean-reverting Constant elasticity of variance (CEV) model and double CEV models. Numerical results show that the proposed method is accurate and efficient.